Bankruptcy Law

A Chapter 7 bankruptcy means that the court is petitioned to discharge all or most of the debts in exchange for the debtor’s agreement to allow a bankruptcy trustee to assume control of any property or assets owned that are not deemed to be exempt from collection. The assets are then sold and the proceeds are distributed to the creditors.

Certain property can be exempt such as the debtor’s primary home, vehicle needed for transportation, clothing, retirement plans, insurance, tools for work, and other necessities. Public benefits, such as Social Security and unemployment insurance, are fully protected. The debtor may choose the property that is eligible to keep from a list of state exemptions. Any balance of the debtor’s obligations and loans are forgiven and can never be collected. Creditors who may attempt to collect these remaining debts that were discharged can face serious penalties under federal law.

Chapter 7 bankruptcies are the most common, can take three to six months to fully process, and those who have had debts discharged in a Chapter 7 cannot refile within eight years. The bankruptcy is reported on credit reports for up to 10 years.

The Bankruptcy Means Test may be applied to ensure that the person filing has sufficiently low disposable income, and the disposable income remaining after the bills are paid is not enough to start repaying liens, loans, and other debts.

Businesses or small companies that have become insolvent, but want to stay in business, may be able to file for a Chapter 11 bankruptcy. Similar to a reorganization, a Chapter 11 filing allows businesses to obtain protection from their creditors while agreeing to a repayment plan. The debts and liabilities may be restructured and reduced in order to give the business the opportunity to work towards achieving profitability.

With a business bankruptcy, an LLC is similar to both a partnership and a corporation and treated the same as a corporation for Chapter 11 Bankruptcy, as long as the LLC filing has not already been dissolved.

The Chapter 11 Bankruptcy is like a business reorganization in that it provides the business debtor the powers and obligations of a trustee. Some exceptions occur, but typically the business filing for bankruptcy assumes the role of the trustee to propose the schedule. For an LLC bankruptcy, this can affect the extent to which each member of the LLC can participate in the bankruptcy filing based upon equity holdings. In some cases in which a trustee has been appointed by the bankruptcy court to handle the bankruptcy, the operating agreement of the LLC becomes null because an individual member or members of the LLC may be facing investigation or the threat of litigation.

Debtors who are in a higher income bracket may file a Chapter 11 bankruptcy if they fall outside of the debt limits for filing a Chapter 13, and they can propose a plan of reorganization to repay creditors over a period of time. As of April 2019, the adjusted debt limits to qualify for Chapter 13 are $419,275 for a debtor’s non-contingent, liquidated unsecured debts and $1,257,850 for a debtor’s non-contingent, liquidated secured debts.

A Chapter 11 bankruptcy may provide the means for which an individual gets the time needed to properly reorganize their assets and affairs for liabilities considered to be non-dischargeable under the federal bankruptcy code. Non-dischargeable means that the debt is not fully canceled out in bankruptcy – such as payroll taxes. Payroll taxes are serious. If an individual or business fails to pay the taxes, they can be held personally liable. Filing Chapter 11 will stop the fees and penalties from accruing on the unpaid payroll taxes, and legal representation can work with the IRS to structure a repayment plan or an affordable settlement offer.

A Chapter 13 bankruptcy is for debtors that earn higher than average income and have enough disposable income to pay off some of their debts. This allows the debtor to reorganize open loans, liens, and other debts in order to make payments more manageable. As a a reorganization bankruptcy, Chapter 13 allows debtors to retain their property by agreeing to make monthly payments toward their debt over the course of three to five years.

Filing Chapter 13 can mean that specific kinds of secured debt, such as a vehicle loan, may be restructured by reducing principal to the market value of the assets, and lowering payments by extending the repayment period to sixty months. Obligations such as mortgages and taxes owed may be modified as well. Some debts cannot be discharged such as priority debts that include child support, spousal support, and some taxes.

For Chapter 13, the discharge occurs after all the payments under the bankruptcy plan have been made, which takes three to five years. Those who have had debts discharged in a Chapter 13 cannot refile within six years and the bankruptcy is reported on credit reports for the 5 years of repayment.

The amount of the monthly payments will depend on the location of filing and is based on the income of a similarly-situated family in the same geographic area. A bankruptcy trustee also collects a fee and this administrative fee is typically a percentage of the amount that is paid to the creditors. The repayment plan must also state that the debtor will dedicate all disposable income to the creditors for a minimum of three years. Prior to beginning to make payments under the plan, the bankruptcy court handling the case must confirm it and the bankruptcy trustee, or the creditors, may lodge objections to the payment plan.